Former U.S. Treasury Secretary Lawrence Summers warned that developed countries are badly equipped for another recession, both economically and politically, and central banks should be wary of raising interest rates just to stop inflation running slightly hot.
“The consequences of another economic downturn dwarf and massively exceed any adverse consequences associated with inflation pushing a bit above 2 percent,” Summers said Monday at a European Central Bank conference in Sintra, Portugal.
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The remarks come as the world’s most powerful monetary policy makers start scaling back the extraordinary levels of support they’ve lent their economies since the financial crisis a decade ago. The U.S. Federal Reserve last week raised interest rates by a quarter percentage point and signaled a faster pace of future increases, and the ECB announced it will taper its bond-purchase program.
Summers said interest rates are unlikely to return to historically normal levels before the next recession, leaving central banks unable to respond with the level of force necessary to effectively address the slump. He added that another downturn would worsen the forces of populism and protectionism that have been on the rise in much of the developed world.
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“It is a matter of most extraordinary urgency to avoid in the foreseeable future, for as long as possible, another economic downturn,” Summers said, calling on central banks to complement their standard price-stability mandates with a policy of maximum sustained full employment.
His comments echoed sentiment earlier on Monday by billionaire hedge fund manager Paul Tudor Jones.
“The next recession’s really frightening because we won’t have any stabilizers,” Jones said on Yahoo Finance. “Monetary policy will exhaust really quickly” while fiscal stimulus won’t be available.
ECB President Mario Draghi, Fed Chairman Jerome Powell, Bank of Japan Governor Haruhiko Kuroda and Reserve Bank of Australia Governor Philip Lowe are scheduled to appear together for a panel discussion Wednesday afternoon local time at the conference just outside Lisbon.
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